On May 16, the Federal Energy Regulatory Commission held a meeting in Washington, DC focused on coordination between the natural gas and electric generation industries. The issues tend to be regional, but low gas prices and increasing gas dependence by electricity generators have created a confluence of interests nationwide and an increasing focus from industry participants and government policy makers.

New England is the poster child for the problems.

According to recent U.S. Senate testimony by Gordon van Welie, president and CEO of ISO New England, the limitations of regional market design and inadequate fuel arrangements by generators have inhibited pipeline-system expansion and new-pipeline construction and "have led to serious reliability threats to the bulk power system." He noted that ISO-NE planned "to address these issues, primarily through changes to New England's wholesale electricity markets."

King Gas

Natural gas combined-cycle units account for approximately 12,000 of the 14,000 MW of generating capacity built in the last 15 years in New England. In 2000, natural gas fired 15% of the region's power. In 2012, that total rose to 52%. Moreover, low-priced natural gas and rising oil prices have boosted the gas portion of the home heating market in the historically oil dependent region.

Lower gas prices have benefited consumers, but the New England wholesale gas markets still experience frequent delivery constraints. In turn the gas market has responded to the price signals caused by these constraints with high spikes in gas prices at various New England entrance points. For one thing, New England, at the end of the gas line from western Canada and the southern United States, can feel redounding constraints. Also, inexpensive Marcellus shale gas has displaced long-haul gas from the Gulf of Mexico and resulted in more exports to Canada. Imports (particularly of LNG) from Canada have dropped, due to production problems and to lower wholesale prices.

On the generation side, most natural gas-fueled capacity in the region does not have firm pipeline transportation service, relying instead on capacity held by others, capacity release or non-firm pipeline transportation. At the same time, most of New England's gas-fired power plants are not dual-fuel capable and can't use oil as a gas substitute when needed. The result is a "just-in-time" natural gas ordering and delivery system.

Conundrum

The prospect for the 2013-14 winter is more delivery constraint, higher price spikes and more demand. For most gas-fired generators, the non-firm market is preferable to holding long-term contracts because they want to avoid take-or-pay firm obligations when ISO-NE markets do not generate prices that would support firm capacity on the pipelines. ISO-NE markets simply do not support such a long-term economic commitment. At the same time investors in gas pipelines and gas storage infrastructure require long-term commitment, generally in the form of firm contracts, creating one of the many conundrums of electric-gas market coordination. Here are some fixes either in practice or proposed by the ISO:

• Create a system to allow the sharing of generator-specific information with gas pipelines. FERC approved provisions for this in Docket No. ER13-356. The goal is to facilitate communication with pipeline operators to alleviate emergency situations.
• Align day-ahead market timing. The unaligned schedules of gas and wholesale electricity markets make it difficult for generators to participate in both and for the ISO to determine when to call on non-gas resources. FERC approved the ISO's proposal (Docket No. ER13-895) to move up the day-ahead gas market timeline.
• Use replacement reserves to model normal "supplemental" commitment and improve real-time price information. The system operator proposes a reserve constraint penalty factor ($250 per MW) for replacement reserves.
• Improve incentives with the forward reserve market to be available and perform when dispatched. For a shortage event (when the power system is using nearly all available resources), the ISO hopes to modify the trigger for when it measures the performance of generators with 30-minute operating reserve obligations; the ISO also will modify the penalty rate for underperformance. The shorter trigger's purpose is to provide the incentive to perform during at-risk periods.
• Improve incentives with the forward reserve market. For a power shortage event, the ISO hopes to modify the trigger for when it measures the performance of generators with 30-minute operating reserve obligations; the ISO also will modify the penalty rate. The shorter trigger's purpose is to provide the incentive to perform during at-risk periods.
• Modify the definition of a forward capacity market (FCM) shortage event. This would have an earlier trigger and increased penalties, as well.
• Allow hourly (rather than daily) offers and intra-day offer modifications (rather than only prior to the operating day).

In 2018-2019, ISO-NE plans a pay-for-performance incentive in the FCM for overperforming generators, funded from revenue transfers from underperforming ones, with the goal of driving generators to perform when needed and to invest in fuel security. The ISO anticipates filing these FCM changes in late 2013.

How far can ISO-NE go? On November 5, 2012, it released a memo outlining generator performance obligations in its tariff. The ISO had three expectations of note:

• Market participants are obligated to respond to dispatch instructions to provide energy and reserves.
• A participant is excused from meeting that obligation if it is physically unable to do so due to events that are beyond its control (i.e., equipment failure, transmission line outage, a physical interruption of the fuel supply).
• If a market participant can't meet its obligation to provide energy and reserve, it must declare a forced outage and report it to the ISO; but the declaration does not excuse the participant's failure to take the actions that are within its control to perform. For example, market participants must obtain fuel sufficient to meet the terms.

In a May 2013 complaint to FERC, the New England Power Generators Association claims that the only way to meet those obligations is to have adequate fuel around the clock, which is tantamount to having a contract for firm natural gas. NEPGA asked FERC to overturn the policy; ISO-NE avers that it is not mandating firm contracts.

But New England needs more pipelines. Generators will react then to the planned "incentives" for stimulating that investment if the price signals in the market support that investment.